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February 1 rule to allow FHA borrowers to make offers on foreclosed properties
According to a January 16 report in the North County Times, the FHA has announced a one-year reprieve from the administrations “anti-flipping” to start in affect on February 1, 2010.
The anti-flipping rule was instituted in 2004 as an attempt to prevent FHA loans from getting caught up in speculative buying by FHA-backed borrowers. Yet at the time, FHA loans comprised a miniscule percent of the loans in the market and only prevented a few hundred FHA loans a year.
Now FHA loans represent approximately 28.1 percent of all loans in San Diego County according to real estate data firm DataQuick.
The abundance of housing demand in the current distressed housing market has been a source of much frustration, particularly for first time buyers looking to use an FHA-backed loan in order to take advantage of the first-time buyer’s $8,500 tax credit. The tax credit, which was already extended once, is widely expected to end for contracts not signed before April 30, 2010.
Until February 1, 2010, only cash and conventional loan borrowers have been able to purchase homes that had been foreclosed by investors. This left FHA borrowers with good credit yet with limited funds no ability to make offers on those homes.
The exact affect of this suspension is uncertain with continued demand for the homes by all cash buyers and conventional loan buyers who usually put down at least 20% on their purchase. FHA borrowers normally only provide 3.5% down and additional FHA “health and safety” rules can make investor asset managers wary about contracting with FHA borrowers.
However, the suspension will be welcome for buyers and the real estate community that represents them.
Time will tell if the suspension translates into more sales of foreclosed and distressed properties to FHA borrowers during February, March, and April when the first time buyer credit ends.
For more info: Brian Flock may be reached at brian@flockdreamhomes.com, (619) 793-5224, or www.FlockDreamHomes.com. NEW! Get a FREE home search phone app for GPS enabled smart phones by texting FLOCK to 87778 or by visiting http://www.SanDiegoSmarterAgent.com
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FREE GPS-powered phone app gives YOU instant home details throughout San Diego County
As a progressive service to you, a San Diego real estate firm is offering for free a way to view all of the homes for sale in the area using virtually any cell phone.
Broker Brian Flock of Flock Dream Homes will send you a FREE mobile real estate search created by Smarter Agent that makes it possible to search all local property listings from your mobile phone.
With the Flock “Smarter Agent” application, you can be in any San Diego neighborhood and view detailed property information at the touch of a button from the local Multiple Listing Service (MLS) used by thousands of agents in the area.
The GPS technology in your mobile phone, when available, locates your phone location and pulls up addresses and information on listings in their immediate area. Sales price, square footage, tax information, beds/baths, interior features, photos and more become available instantly in the palm of their hand.
It’s like having a super responsive broker along for the ride wherever you happen to be... without the pressure having to see bad properties. Simply press a button and see the MLS details of the house right in front of you! Press another button and talk to a licensed agent about the property or to schedule a tour.
You can get Flock Smarter Agent on your cell phone by visiting http://SanDiegoSmarterAgent.com for easy instructions or simply by texting FLOCK to 87778 to receive a link to download the mobile real estate application.
The Flock Smarter Agent application is available as a fully downloadable application on hundreds of devices across Sprint, AT&T, T-Mobile and Verizon Wireless. A premium mobile web version is also available on 95% of cell phones. The fully downloadable application is free to download on Sprint devices, BlackBerry devices, the iPhone, and Google Android devices.
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Hispanic clients under-represented in San Diego County
In a nation where the Hispanic population is growing faster than any other ethnic group, it is regrettable that so many of these people have been poorly or underrepresented in the home buying process.
Thousands are facing foreclosure and many others have succumbed to “loan modification” scams that have finally been partially curtailed in California with the elimination of up-front fees.
Are you a licensed real estate agent? Do you meet Hispanic, bilingual clients who could be well served by a fluent Spanish-speaking broker?
Let’s make sure to serve those clients cooperatively and well!
You will get a 25% referral fee on that side of the business and your client will get the attention, cultural sensitivity, and ethical treatment that they deserve.
Call me, Brian Flock, at (619) 793-5224 or (760) 271-8761 or write me at brian@flockdreamhomes.com and I will gladly send you a referral agreement via Docusign.
The über-responsive (AND BILINGUAL) broker
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Company adds field service personnel to assist distressed homeowners by Brian Flock
Distressed home owners with a Wachovia or World Saving home loan in San Diego County can breathe a little easier heading into 2010. Wachovia (which bought World Savings and which was itself acquired by Wells Fargo) has just rolled out its successful short sale program throughout San Diego County. The new program is targeted to previous borrowers with hardships that prevent them from qualifying for a loan modification.
Wachovia’s enhanced customer service program called the Wachovia Short Sale is even more progressive than Obama administrations new Home Affordable Foreclosure Alternative (HAFA) program (which won’t begin until April 5, 2010). The key differentiator to the Wachovia program is local field customer service personnel employed by Wachovia whose job it is to work with borrowers and real estate agents to find the best path to debt relief and relocation assistance, while avoiding foreclosure.
Unlike a typical short sale that can take from several months to over a year to complete, the Wachovia Short Sale program commits to 45 day closings on short sales with 38 days being the average according to sources at the company. This helps ensure that the new home buyers stay engaged with the sale and that the current home owner is relieved of their mortgage deficit.
Responses to purchase offers are generally provided within a week and relocation assistance is available to distressed home owners as necessary. This helps the home owners better preserve their credit score by avoiding lengthy closings. Owner relocation assistance of up to $5,000 by Wachovia has been reported in comparison to HAFA’s program that offers $1,500 to distressed borrowers.
Based on other new FHA lending programs offered by certain investors, Wachovia home owners with good credit but who are experiencing a hardship with their current mortgage may even qualify to purchase a new home immediately after the Wachovia Short Sale at today’s more affordable home pricing.
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Real Estate Today,
the weekly on-air talk show hosted by George Chamberlain and sponsored by the San Diego Association of Realtors
(SDAR) president Erik Weichelt, addressed the facts and myths
about real estate in Mexico on Sunday, December 6, 2009 from 9:00 am to 10:00 am
on KOGO AM 600 radio.
Special guests on the
show included three US citizen real estate professionals: Larry French, Roy
Warfield, and Brian Flock. The three are realtors, with two of them practicing
in both San Diego County and Mexico.
The relative strength
of the dollar and US retiree desires for coastal living have caused many to
consider real estate south of the United States border, in Mexico. Yet
controversy invariably touches this southern neighbor, particularly over the
past few years.
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by Brian
Flock (Mexidata.info
contributor and San Diego Real Estate Examiner)
December 6
– KOGO AM 600 radio program to cover facts and myths of life in
Mexico
Real Estate Today,
the weekly on-air talk show sponsored by the San Diego Association of Realtors
(SDAR) and hosted by SDAR president Erik Weichelt, will address facts and myths
about real estate in Mexico on Sunday, December 6, 2009 from 9:00 am to 10:00 am
on KOGO AM 600 radio. A live online simulcast also will be available at the
following web address: http://www.am600kogo.com/mediaplayer/?station=KOGO-AM&action=listenlive&channel_title=
Special guests on
the show will include three US citizen real estate professionals: Larry French,
Roy Warfield, and Brian Flock. The three are realtors, with two of them
practicing in both San Diego County and Mexico.
The relative
strength of the dollar and US retiree desires for coastal living have caused
many to consider real estate south of the United States border, in Mexico. Yet
controversy invariably touches this southern neighbor, particularly over the
past few years.
Topics will include
the state of the “Baja Boom”; the war on drugs; legal distinctions between the
US and Mexico; health care and costs; details about property ownership in
Mexico; and expectations for the future.
——————————
Brian Flock, a
contributor to www.MexiData.info, is a licensed
California broker (01870163), as well as a degreed and certified broker in
Mexico. He is a Realtor and a member of both SDAR and AMPI Rosarito. Mr. Flock may be contacted at Flock Dream
Homes (www.flockdreamhomes.com ), brian@flockdreamhomes.com , or (619)
793-5224.
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First time home buyers in San Diego get $8,000, others up to $6,500
US Senators yesterday voted yesterday to approve bill HR 3548 which was primarily intended to extend unemployment benefits. However, as with most bills, a variety of other legislation was bundled in the bill including an anticipated extension of the first time buyer tax credit and extensions of the credit to certain, existing homeowners as well.
Although President Obama has line item veto rights on the tax credit, official positions of the White House have generally been supportive and industry lobbyists have been working hard to press forwarding on the extension. The House may approve the bill as soon as today.
Ergo, this is fully expected by most experts to become law very soon.
First time buyers
The extension of the tax credit for first time buyers (i.e. those who haven’t owned a home in at least three years) is fairly straightforward.
Instead of a November 30 deadline for real estate closings, the new law would allow for purchase agreements as late as April 30, 2010 and closings as late as June 30, 2010 for the maximum $8,000 credit.
Maximum income limitations have been expanded making the program available to even more buyers. Individuals may now make up to $125,000 and married couples may have income of up to $225,000. (Higher income individuals may receive reduced credits.)
Existing home owners
As for existing home owners that have been in their home for at least five years of the last eight years, they will be eligible for a $6,500 tax credit with a maximum home price of $800,000. This provision is intended to spur home upgrade purchasing for those who are still likely to have some equity in their homes.
Military personnel from San Diego
Members of the military who have served overseas for at least 90 days between January 1, 2009 and May 1, 2010 will receive one year extensions on the credit deadlines.
Tax payers who complete a transaction in 2010 but before their 2009 tax filing deadline will have the option to apply the credit to their 2009 taxes instead of their 2010 taxes.
For more info: Brian Flock may be contacted at www.flockdreamhomes.com , brian@flockdreamhomes.com , or at phone (619) 793-5224
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Very few home owners in San Diego have access to the program
by Brian Flock
There are a number of myths in the market about US government programs intended to address the traumatic economic situation in housing market, including our local market in San Diego County. At least five common myths in the mind of the consumer public should be dispelled and addressed with action on the part of homeowners with burdensome home loans.
MYTH #1: “The government will save my home.”
FACT: The US government is fighting very hard to salvage the economic engine of the country and certainly housing factors into that as the largest single purchase of most peoples’ lives. Further, a home is the symbol of the American dream.
However, in the end, only the homeowner/borrower has the power to and can decide to save their home. The government simply provides a vehicle of lower interest and an extended payment term but no debt forgiveness.
There is no “free money” in the Government proposals for distressed homeowners.
MYTH #2: “The Making Home Affordable (MHA) modification program rewards my good credit history.”
FACT: Although the program does include extra incentives for participating lenders to help distressed borrowers with a good payment history, the program also provides incentives for borrowers who are well behind in their payments.
It is essential for home owners to understand that the Making Home Affordable program keeps borrowers in their homes only by lowering monthly payments.
The MHA does not lower the principle of the loan, even for those who have never been late on their loan.
Therefore the MHA is more akin to a pain reliever or band-aid than it is a solution to the financial dilemma of owing much more than the market value of a home.
MYTH #3: “Obama’s MHA program will eliminate my excess loan debt.”
FACT: As stated previously, the MHA program is simply intended to give certain qualifying people the opportunity to keep their home. However, the program itself does not forgive any debt or accrued penalties or fees.
What the program does is to lower monthly payments by applying a lower interest rate of 2% and an extended loan term of up to 40 years which does lower the monthly payment. However, the fact is that all principle and accrued interest or penalties must be paid back over time.
The following is an example of before and after an MHA modification:
| Current, distressed home loan | After an MHA modification |
Market value of house | $250,000 | $250,000 (no change) |
Loan balance | $300,000 | $300,000 (no change) |
Homeowner equity | -$50,000 (-16.7%) | -$50,000 (-16.7%) |
Interest rate | 5.5% | 2.0% |
Term | 30 years | 40 years |
Monthly payment | $1,703.37 | $908.48 |
Clearly the modification of this loan would result in a huge reduction in the monthly mortgage payment. Yet the loan balance and owner’s equity position are unimproved making the home unmarketable until housing prices recover.
MYTH #4: “All home loans are eligible for the MHA modification program.”
FACT: Most loans on homes in San Diego are not eligible for the Making Home Affordable modification program.
In order for a borrower to be eligible for the MHA modification program, all of the following must be true:
1. The home must be the borrower’s primary residence
2. The loan must be less than $729,750
3. The loan balance can be no more than 25% higher than the market value of the home.
a. Example: A $300,000 loan on a home that is now worth $200,000 would not qualify because the loan is 50% higher than the house.
4. The borrower has a bona fide financial hardship
5. The loan was received before 2009
6. The current loan payment must be more than 31% of the borrower’s monthly gross income.
7. The loan is a “conforming” Fannie Mae or Freddie Mac loan
Therefore, these qualifications exclude:
· San Diego home owners whose loans exceed their home value by more than 25%--possibly the majority the home owners who have purchase between 2002 and 2007
· Borrowers who don’t have a bona fide hardship or who qualify for a regular refinance
· Jumbo loans and other non-conforming loans
· Investment properties
In these cases, homeowners are wise to proactively face their alternatives of refinancing, short sales, foreclosure, or even bankruptcy, thereby getting a fresh start from an incredibly difficult time in the economy.
MYTH #5: “All lenders that received Government bailout money are obligated to offer the program.”
FACT: The MHA modification program is a voluntary program whereby the Government tries to encourage lenders to perform modifications through modest financial incentives. In reality, the independent lenders are not highly motivated by the MHA incentives and many don’t actively participate.
Borrowers who don’t qualify for the MHA modification or whose lender doesn’t participate should consult with a licensed real estate and tax accounting professional to understand their options. They should also avoid predators who promise “clean solutions” yet charge exorbitant, up-front fees for what can be obtained for free or at low cost.
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by Brian Flock
If it’s not common knowledge already, I’ll announce it now: short sales and foreclosure home purchases in San Diego County require a special tact and patience in order to purchase successfully. Full stop.
This truism applies to both buyers and the agents that represent them in a home purchase.
The National Association of Realtors reports that these distressed properties have been accounting for about a third of national sales recently and this percentage is significantly higher in San Diego County where a dizzying number of homes have more negative equity than the national average.
Commercial tools for tracking troubled properties are available to consumers and agents starting at fees of around $50 per month. Yet there is a distinct difference between having loads of data and successfully purchasing a home in the complex world of real estate.
Distressed short sale and foreclosure properties differ from a typical real estate listing in several ways:
· The majority of these distressed properties are the feared “shadow inventory” that has banking and government officials scrambling to find measured solutions—along with wringing their hands in private.
· The real estate often arrives into the market by non-traditional methods. Banks have asset managers and loss mitigation experts to manage and dispose of properties. These managers are so overwhelmed that it is currently impossible to predict how a particular distressed home will be released to the market. Managers only talk to a handful of real estate brokers and virtually zero consumers.
· There is little (or no) room to negotiate non-cash concessions (such as repairs) from the seller. This can rule out VA loans, non-conforming loans, and buyers without substantial cash. (One notable exception is buyers who utilize an FHA 203K loan.)
· The southern California multiple listing service (MLS), SANDICOR, recently added a special listing status for short sales and foreclosures. (Yet recall that the vast majority of distressed properties are NOT yet in the MLS.)
The good news is that the government is taking notice and realizes that the Making Home Affordable (MHA) program (i.e. simply refinancing at lower interest rates) will not work for many situations.
The Federal Housing Administration’s commissioner, David Stevens, recently commented that “… the MHA program will not reach every at-risk homeowner or prevent all foreclosures… the Foreclosure Alternatives program that will provide incentives for, and encourage, servicers and borrowers to pursue short sales and deeds-in-lieu (DIL) of foreclosure.”
Forthcoming proposals from the US Treasury may motivate lenders to streamline the short sales process.
How is a buyer to identify appropriate distressed properties?
One way is to go solo, paying the $50 per month to companies such services as ForeclosureRadar.com and RealtyTrac.com. With some experimentation and configuring, you can get alerts on changes in specific properties. Note that these alerts almost never include photos other than satellite images of the neighborhood so don’t expect to know the current condition of the home or its décor.
Another option is to form a relationship with a trusted agent who understands the inner workings of these tools and have that person set you up for alerts conforming to your needs at their expense. That person can also do the leg work of photographing the property, interpreting the data, and getting additional facts from local title companies.
Either way, you’ll find yourself making an offer to a real estate professional when the property ultimately comes to the open market.
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.jpg "VA loan limits for San Diego County")
Yet many veterans and home sellers are unaware of the benefits of VA real estate loansMilitary bases in San Diego include the largest concentration of naval facilities in the world; Marine Corps bases such as Camp Pendleton that encompass over 125,000 acres; and Coast Guard stations. With a strong military history dating since World War II, the VA home
loan program in San Diego honors the commitment and sacrifice on the part of the Country’s service men and women. Yet the qualifications and benefits of this program meant to assist our military members are a mystery to many veterans and most homes sellers in
San Diego County.
Veteran home buyers in San Diego
The primary benefit of the VA program to veteran home buyers in
San Diego is that they can get a no-down-payment loan at competitive interest rates with no need for additional private mortgage insurance. VA loans are available through traditional lenders subject to more liberal terms such as lower credit scores and higher debt-to-income ratios.
In general, eligible veterans are those who served in the US military as follows:
· World War II until 1980 : At least 181 days of continuous active duty; or
· 1980 until 1990: 24 months of active duty (or the full period of at least 181 days for which ordered or called to active duty); or
· August 1990 up to present (i.e. the Gulf War period): 24 months of active duty (or the full period of at least 90 days for which ordered or called to active duty).
· Reserve or National Guard members without sufficient active duty after 6 years of service.
Service times less than those above can also be approved for a VA home loan in the case of a service-related disability.
The quickest way for a veteran to verify their eligibility is to contact a participating lender to get their “Certificate of Eligibility” via the “Web LGY” system. This modernized system launched by the VA in 2006 can provide eligibility confirmation in seconds.
San Diego home sellers—No military service required
San Diego home sellers (including home owners, banks, and even real estate professionals) have been historically cautious about VA-loan-based offers in periods of high real estate demand or, conversely, low inventory. This is due to the VA loan’s particular requirements that health and safety issues be addressed prior to closing; the 45- to 60-day closing period for loans; and the limitations on closing costs paid by the veteran buyer which may require credits from the seller. However, since the current inventory situation is thought by many experts to be an artificial, and since many “cash” home offers are falling out of escrow, the day of the VA loan may have arrived. The VA loan is best suited to moderately priced homes in good condition (as opposed to foreclosed properties in disrepair) since critical health and safety repairs must be completed before closing. As with FHA loans and other home loans programs, formal pre-approval is a prerequisite for an offer to be taken seriously; pre-qualification letters simply won’t suffice in most situations these days. As more shadow inventory of delinquent and foreclosed homes are offered for sale on the San Diego real estate market, the strength of the VA program and its low down payment may be a boon for both vets and motivated home sellers.
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by Brian Flock
Market conditions require better preparation before making an offer
Buying a home in San Diego is more complex than ever. Yet responsibility for navigating the lending process remains squarely on the shoulders of the borrower. The lending “game” may have been easier in the past but home buyers have no choice but to play by today’s more challenging standards.
I regularly hear stories of frustrated borrowers that are experiencing pain with today’s stringent lending requirements. Gone are the days of easy money with no-documentation and subprime loans; and “appraisal shopping” to match or exceed an offer price. In fact, most lenders are being more restrictive on conforming loans than what conforming loans regulations require.
Alas, borrowers’ need to adapt to the changed circumstances by polishing their “5 C’s of credit,” ideally before seeking and loan. Borrowers also need to stay flexible with the extensive requirements that they will experience from loan underwriters (i.e. credit risk reviewers) who are the primary judges of a given loan application.
Character
Underwriters evaluate the borrower’s “character” (i.e. integrity) for paying back the loan. This typically starts by looking at the middle FICO credit score from the three major reporting agencies. Options for those without a “good” FICO score (i.e. 700-750 or more) have been reduced substantially as a result of the lending market crisis.
Borrowers should take immediate action to any erroneous reports of late payments, bankruptcies, collections, and judgments as these can have a dramatic affect on FICO scores.
Credit report errors can be contested and removed from each of the reporting agencies. This requires patience and up to 30 to 45 days of processing but can be done online at:
Capacity
Sufficient cash flow is what defines the buyer’s “capacity” to repay a loan. However, items in the past that were taken based on written statements will now likely require extensive documentation. Self-employed individuals will need to provide at least two years of tax statements with all requested supporting documentation, no matter how onerous.
Whereas some loans in the “boom” period allowed debt ratios to be over 40% of gross income, current conforming guidelines are back to maximum housing obligation of 28% with all debt needing to be less than 36%.
Some types of income will likely not be considered at all such as secondary income that will continue for less than three years (e.g. grants); non-cash benefits; inheritances; and lawsuit settlements. Only a portion of rental income will be considered, usually 75% (or 90% in the case of FHA loans).
Capital
Net worth—especially liquid assets such as bank accounts, stocks and bonds—will be considered as available “capital” to help ensure that you will repay the loan. Capital, if substantial, can also be a somewhat compensating factor for other deficiencies in an application.
Collateral
“Collateral” (i.e. the assets to secure the debt) has become one of the greatest sources of loan frustration in the current San Diego housing market. This is because (artificially?) low housing inventory has resulted in many offers that exceed appraisal values. Further, new regulations have taken great strides to eliminate “appraisal shopping.”
Lenders simply cannot reasonably be expected to lend where their exposure is increased by an offer that exceeds the appraisal value.
Conditions
“Conditions” is a catch-all phrase for the lender’s view of the borrower and the general economy. Conditions are really internal policy guidelines and vary by lender.
There is little value in fighting an underwriter’s view of your borrowing conditions if your situation is against internal policy.
Instead, seek out a lender who may be more attuned to your situation.
Play by the new lending rules and polish your “5 C’s of credit” before you need them to shine.
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(1).jpg "FHA loan limits in San Diego County")
Plus tips to make your FHA offer stand outby Brian Flock
The US government stimulus programs were in part designed to increase home ownership and to decrease home foreclosures. In support of this, Federal Housing Association (FHA) loan limits have nearly doubled to nearly $700,000 in San Diego County (see graphic) and yet still require less than a 5% down payment. Lending requirements have required a modest FICO score and two years of verifiable employment.
So why are so many would-be-home-buyers in San Diego expressing frustration over their offers being ignored when they are based on FHA loan contingencies?
With foreclosure (aka REOs) and short sale properties being the majority of housing inventory, the answer comes down to the unique health and safety requirements of FHA loans, plus the myriad of documentation requirements.
According to the FHAs own website that documents the program, an FHA loan requires the “timely cooperation of up to 53 different parties.” Any misstep by any one of those parties can easily result in a day to four weeks of delay in the closing. Lenders in control of REOs and short sales often don’t view those extra hurdles as worth the risk when they know that they are already going to lose a lot of money on the sale.
However, on July 9, 2009 the Mortgage Bankers Association said that FHA loans had risen to a full 35.9% of all loan applications, an increase of nearly 530% since August 2005 at the height of the real estate boom. There is clearly demand for these loans and the market will need to find a way to accommodate them, especially with an expected wave of short sales and REOs to hit the market this fall.
What can FHA buyers do to improve the chances for an FHA offer despite t he hurdles for sellers of distressed properties?
Here are some tips:
1. Get pre-approved for an FHA loan from a ”top-tier” bank. Listing agents and sellers (such as banks) of distressed properties will usually ignore “pre-qualification” letters and even pre-approval commitments from second tier banks.
3. Be sure to do a good comparison of recent sales within the past 6 to 12 months within a one mile radius of the home of interest before making an offer. The offer will need to be in the ballpark of these homes since FHA appraisals will likely use the same homes in their appraisal.
4. Target properties that have already fallen out of escrow. The sellers will be more motivated to get such homes moving.
5. Make the offer based on a realistic closing timeframe of 45 days, not the historical standard of 30 days. Although this may seem to make your offer less attractive at face value, it shows the seller that you understand the realities of delay in the current financing market.
6. For condos, have your real estate agent make sure that the condo building in question is already FHA approved.
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By Brian Flock
The state of housing in each area of San Diego County
As a service to Examiner.com readers, the following price trends are provided for every city in San Diego County (and in alphabetical order).
Would you like more details on a specific ZIP code within a particular city? Simply request automated reports from the form at the bottom of this column.
All the market trend charts on this page are 'live' meaning that the data is always updated no matter when you return to review this Examiner.com news article.
Would you like many more details for a particular part of the market? Subscribe to Brian Flock's Real-Time Market Report at the bottom of this column. It's all about what's going on right now and it's free to you as a reader of this Examiner.com news article.
For more info: Brian Flock may be reached at brian@flockdreamhomes.com, (619) 793-5224, or www.flockdreamhomes.com.
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By Brian Flock (Examiner.com)
Distressed properties receive a “blight bailout” from Government-backed “renovation loans”
Most first-time home buyers in San Diego have been looking for the perfect starter house. Yet in a market full of distressed properties from short sales to foreclosures, the ideal starter home can be hard to acquire. Frustrated by bidding wars due to artificially low inventory, many would-be buyers have made a dozen or more offers on starter homes just to be frustrated by (lower) cash offers, or by property problems that result in low appraisals, thereby making a traditional loan impossible.
Distressed properties in decent locations are fetching multiple offers and traditional, conforming loans for under-maintained homes are virtually impossible to get in today’s stringent lending environment. The solution for determined home buyers could be to buy a less-than-perfect house in a desirable neighborhood and to renovate it using a FHA 203(k) loan.
Conforming loans often don’t work for distressed properties
Conforming loans (including standard FHA, non-203(k) loans) generally require that all structural, health and safety issues be remedied prior to closing of the sale.
However, short sale properties and foreclosures (aka REO sales) are often neglected and vandalized properties that don’t qualify for a standard loan without substantial repairs by the sellers. Unfortunately, sellers—often banks—with negative equity simply aren’t willing to make the investment and have tended to seek out cash buyers, most of whom are investors who plan to instead buy the home as-s, perform minimal repairs, and rent out the house.
The effect of government moratoriums on foreclosures can’t last forever and we will soon find ourselves back in a period of high inventory. A tendency towards the buyer’s market is heading at us with no substantial relief in delinquencies and joblessness. So what is to become of the expected increase in short sale and foreclosure properties that are already becoming eyesores in their respective neighborhoods?
Solution can be the FHA 203(k) loan
For good-credit buyers with vision and patience, the answer to realizing their American dream may lie in the FHA 203(k) loan which is designed to renovate neglected properties. Never has this 35 year old program been more necessary or appropriate than in the current, San Diego home market crisis.
How the program appraises a San Diego home’s value
Simply put, the FHA 203(k) loan is a loan guarantee to traditional lenders that encourages them to lend money on run down properties subject to the following appraisal criteria:
· First, an appraisal determines the current, as-is home value in its less-than-ideal state.
· Second, FHA guidelines, overseen by a certified HUD consultant, authorize repairs and upgrades to improve the value of the property according to guideline amounts by region.
· Finally, the lender sums up the as-is home value plus the value of the repairs/upgrades and factors in a buffer amount. In other words, the lender can offer somewhat more than the sum of the as-is value of the home plus the authorized cost of the repairs and upgrades.
The program recognizes that many buyers don’t want to live in a loud and dusty construction zone so the loan allows the buyers to finance up to six (6) months of mortgage payments during the repair work. (This feature has offered the additional benefit of saving more than a few relationships!)
The program also addresses multi-unit buildings up to four (4) units or even up to eight (8) units if the number of units will be reduced to the maximum four (4) dwellings with goal to make the property more marketable. Although one of the units must be owner-occupied, there is no requirement that the owner occupy the largest dwelling. As an added bonus, the FHA counts resulting rental income at 90% of rent (instead of the traditional 75% for conforming loans) making the qualification for multi-unit properties manageable.
FHA 203(k) program is also benefit for real estate agents/brokers
Real estate agents brokers should also be more supportive and knowledgeable about this program in the current environment. Brokers that list foreclosures (i.e. REOs) are often relegated to pay for repairs before sale and can wait months for reimbursement from the seller. The FHA 203(k) program defers such maintenance until after the close of escrow which should delight most agents who only get paid at closing.
The hyped “streamlined (k)”
There has been some level of “buzz” lately of the relatively new Streamlined (k) loan and substantially more lenders offer this program that the regular FHA 203(k) loan. However, practical uses of the streamlined program have been hard to find here since the program is limited to total repairs of $35,000 and distressed houses in San Diego often exceed that amount when reviewed prior to closing.
Most generally, the standard FHA 203(k) loan (i.e. not the streamlined one) is the most widely applicable renovation loan. The reality of both loan 203(k) programs is that they take about the same amount of time and the streamline loan may only save a couple hundred dollars in HUD Consultant fees which later need to be spent on a standard FHA 203(k) loan.
Increased loan limits in 2009
One historical barrier for home buyers with FHA loans in San Diego County have been the relatively low loan limits. Up to March 2009, the FHA 203(k) loan limits were $362,790 (single family home); $464,449 (duplex); $561,411 (triplex); and $697,696 (4-plex) with a 3.5% down payment.
However, this years’ stimulus program increased those limits by nearly 100% resulting in maximum loan values of $697,500; $892,950; $1,079,350; and $1,341,350 respectively with only 5% down. Further, buyer down payments and closing fees can count the new $8,000 tax credit (for first time/new buyers) and other seller credits up to 6% of the purchase value.
San Diego home buyers with vision
Buyers with a penchant to look past a rough exterior and see a vision for their future home have a exciting way to purchase short sales, foreclosures, and other homes with deferred maintenance through the FHA 203(k) program.
Not all loan brokers offer loans for the FHA 203(k) so buyers are encouraged to find a lender with years of experience in these loans.
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Something Really Strange is Happening in the San Diego Home Market
Can Buyers and Sellers Make Sense of It?
Bidding wars. Moratoriums. Foreclosures. Short sales. Rising and falling median home prices. Over-reported home sales in May.
How are San Diego buyers and sellers supposed to interpret it all?
This much is certain. Something very strange is happening in the San Diego home market as a result of natural market dynamics and artificial government regulation.
On one hand, we hear about the diminishing number of foreclosures because of the government imposed moratorium on lending institutions. The government is saying to banks, “Since we've saved you with public money, we are going to make it harder for you to foreclose on peoples’ homes.”
We also hear about the difficulty of successfully navigating short sales. These deals seem to frustrate all involved as they wait for lenders to agree to reasonable terms.
Meanwhile the banks have investors demanding that something be done with the non-producing home loan assets. The foreclosure inventory diminishes and bidding wars ensue on the relatively few available properties while pressure builds within the banks to get rid of the many (and growing) delinquent loans.
This conflict of market economics and government regulation has created some truly strange symptoms.
An Actual Case Study of the Confusion
This week I heard about a foreclosure (REO) “sale” to an enthusiastic buyer who needed FHA financing and who had excellent credit. The only problem for everyone involved in the deal was that the accepted offer was 20% higher than the appraisal. (Had the bidding war had gone amok?)
The reactions of various parties to the transaction became sort of a case study of frustration and of how bizarre the current real estate market is in San Diego.
After receiving the lower appraisal, the bank’s REO asset manager indirectly told the buyer to just “cancel” the purchase. The appraisal was simply “unacceptable”.
Ah, but here’s where things get really interesting.
The REO bank and the buyer’s lending bank were the exact same institution. In other words, the REO asset manager couldn’t possibly hope for a more balanced appraisal! (Furthermore, FHA rules require that the appraisal stick with the property for six months after the appraisal so there was no way for the asset manager to "escape" the appraisal.)
The reaction of the buyer’s agent was quite peculiar (and a quite frankly embarrassing). The agent pleaded with the mortgage broker of the bank for a higher appraisal.
This is disturbing on at least two levels. First, the agent should have seen this as an opportunity to be the hero and negotiate a better deal for the buyer. Second, the agent clearly didn’t understand the futility of the request for a better appraisal. Who could possibly be more impartial than an appraiser representing both sides of the deal (i.e. the REO asset manager of the bank and the lending side of the same bank)? Also, FHA lending rules simply do not allow you to "shop" for an appraisal.
So what are we to learn from experiences like this?
Time will tell but in a market of increasing loan delinquencies and high unemployment, the reactions of some real estate players seem to be quite confused and contradictory at times.
Meanwhile, the pressure of investors on their banks’ boards of directors increases daily to take decisive action on non-producing loan assets.
We still find ourselves in a pressure cooker.
Brian Flock is a real estate columnist in San Diego and Baja California, Mexico. He may be contacted at Flock Dream Homes (www.flockdreamhomes.com ), brian@flockdreamhomes.com , or (619) 793-5224.